Porcelli: Fed Needs to Upgrade Its Outlook on Labor Market

By Amey Stone

Calling the Federal Reserve’s description of labor market health in the June policy statement, “inconsistent with reality,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, says a recasting of the job market will be the biggest change in the policy statement issued at the July meeting, which concludes next Wednesday.

He writes Friday:

The Fed weaved a fairly dramatic and negative narrative about the labor backdrop on the back of that poor (and clearly one-off) payroll report. They will now have to walk back that characterization on the heels of the 287k jump in June nonfarm payrolls. At the last go-around, the committee noted “the pace of improvement in the labor market has slowed” and that “job gains have diminished.” This is quite obviously now inconsistent with reality.

He doesn’t expect much change in the characterization of household spending (“strong”) and business investment (“soft”). He does expect the statement to be, “a bit more aggressive with their language on global risks.”

All in all, these are pretty modest changes and he doesn’t think the Fed will signal a near-term rate hike. Not by a long shot. He explains:

The potential for a domino effect to others parts of Europe from the UK referendum is real enough in the Fed’s mind – as suggested in various speeches – that it will, at minimum, stay the Fed’s hand. Nothing short of an inflation “scare” is likely to motivate the bulk of the committee to hike in the interim. And the likelihood of an event like that—when you have soft global economic activity and a firming US dollar—seems unlikely even if we do have some pretty firm domestic-based inflationary undertones.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.